HDFC Asset Management Company (HDFC AMC),a joint venture between Housing Development Finance Corporation (HDFC) and Standard Life Investments (SLI), is the most profitable asset management company in India in terms of net profits since FY2013 with total AUM of Rs 291985 crore as of end March 2018. The profits of the company have grown every year since the first full year of operations in FY2002. The company has been the largest asset management company in India in terms of equity-oriented AUM since the last quarter of FY2011 and consistently remains among the top two asset management companies in India in terms of total average AUM since August 2008.

Among the promoters of the company, HDFC group is a recognized financial conglomerate in India, with presence in housing finance, banking, life and non-life insurance, asset management, real estate funds and education finance. SLI is an indirect subsidiary of Standard Life Aberdeen plc, one of the world's largest investment companies. The strong parentage and trusted brand enhances appeal and provides confidence to customers of the company.

HDFC AMC has recorded healthy 25.5% compounded annual growth rate (CAGR)in AUM between March 2013 and March 2018. As at end March 2018, equity-oriented AUM constituted Rs 149713 crore and non-equity-oriented AUM at Rs 142273 crore of total AUM. The proportion of equity-oriented AUM to total AUM was at 51.3%, which was higher than the industry average of 43.2%, end March 2018. As equity-oriented schemes generally have a higher fee structure compared to non-equity-oriented schemes, the product mix helps achieve higher profits. The market share of total AUM was 13.7% and of actively managed equity-oriented AUM (Rs 144925 crore which excludes index linked and arbitrage schemes) was 16.8% among all asset management companies in India.

Milind Barve, Managing Director, has been with the company since the year of its inception and with the HDFC group for over 34 years. Prashant Jain, Executive Director and Chief Investment Officer joined the Company in 2003. The senior management team has been with the company for an average of 13 years and has a total average work experience of 26 years. The company has strong and stable investment team, which consisted of 26 employees as of March 2018 with an average of over eight years of work experience with Company and an average of over 17 years of total experience.

The company offers a large suite of savings and investment products across asset classes, which provide income and wealth creation opportunities to its customers. As of March 31, 2018, it offered 133 schemes that were classified into 27 equity-oriented schemes, 98 debt schemes (including 72 fixed maturity plans (FMPs)), three liquid schemes, and five other schemes (including exchange-traded schemes and funds of fund schemes).

HDFC AMC also provide portfolio management and segregated account services, including discretionary, non-discretionary and advisory services, to high net worth individuals (HNIs), family offices, domestic corporates, trusts, provident funds and domestic and global institutions. As of March 2018, it managed AUM of Rs 6474 crore as part of portfolio management and segregated accounts services' business.

The company had a total number of Live Accounts of 8.10 million as of March 2018, and the monthly average AUM (MAAUM)from individual customers accounted for 62.2% of MAAUM, compared to the industry average of 51.4%. A key element of the business strategy is to promote a customer-centric culture that spans across all aspects of business. As of March 2018, the company served customers in over 200 cities through pan-India network of 209 branches, supported by a strong and diversified network of over 65,000 empaneled distribution partners across India

As of March 2018, independent financial advisors (IFAs) generated 27.6% of total AUM, national distributors 21.0% and banks 17.3%, while the remaining 34.1% was invested in direct plans. In terms of equity-oriented AUM, IFAs generated 39.2% of equity-oriented AUM, national distributors 24.2% and banks19.1%, while the remaining 17.5% was invested in direct plans as of March 2018.

The company is the forefront of leveraging technology in the Indian asset management sector, with a focus on digitization to transform sales, customer on-boarding and internal processes. The focus on technology has enriched customers' experience and has enhanced the productivity of employees and distributors. It offers products and services through online portal, HDFC MFOnline and mobile applications, both of which have become increasingly relevant to business in recent years.

HDFC AMC has an established track record of delivering robust financial performance. The total revenue increased from Rs 903.11 crore in FY2014 to Rs 1867.25 crore in FY2018, with a CAGR of 19.9%. Net profit has grown from Rs 357.77 crore to Rs 721.62 crore during the same period at a CAGR of 19.2%. Dividend Payout Ratio increased from 41% in FY2014 to 56% in FY2018 and paid a dividend of Rs 336.89 crore in FY2018 compared to Rs 126.20 crore in FY2014. The net worth of the company stood at Rs 2159.97 crore as of March 2018. Return on average net worth exceeded 40% every year since FY2014 and was 40.28% for FY2018.

The Offer and the Objects

The offer consists of an offer for sale (OFS) of 25,457,555 equity shares by HDFC (8,592,970 equity shares) and Standard Life Investments (16,864,585 equity share) totaling up to Rs 2800.3 crore at the upper price band. Post issue HDFC will hold 52.92% and SLI will hold 30.03% of HDFC AMC.

Up to 0.15% of the shares are reserved for HDFC AMC Employees, up to 0.26% of the share for HDFC Employees and up to 1.13% of the share for HDFC shareholders. The Offer and the Net Offer shall constitute 12.01% and 10.46% of the post-Offer paid-up Equity Share capital of Company, respectively.

The entire proceeds from the offer for sale (OFS) will be paid to selling shareholders. The OFS would mop up proceeds of Rs 2787.6 crore at the lower price band of Rs 1095 per share (face value Rs 5 per share) and Rs 2800.3 crore at the upper band of Rs 1100 per share.

The issue is to be made through a book building process and will open on 25 July 2018 and will close on 27 July 2018.

The objects of the offer are to achieve the benefits of listing the equity shares of the company on the stock exchanges. The listing of equity shares will enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

Consistent market leadership position in the Indian mutual fund industry: The AMC is a leader in the Indian mutual fund industry and most profitable asset management company in India in terms of net profits since FY2013. Its AUM has grown at a CAGR of 33.9% since FY2001. As of March 2018, the market share of total AUM was 13.7% and of actively managed equity-oriented AUM was 16.8%. The company had the highest share of individual customers of 15.7% and the second largest market share of MAAUM of 12.7% from B-15 cities in India. Live Accounts increased from 4.94 million as of March 2013 to 8.10 million as of March 2018.

The leading industry and financial position provides with a robust platform for growth and efficiencies of scale, and enhances capability of investing in the growth of physical and digital infrastructure, which would further access to a larger customer base, and provide improved customer experience.

Trusted brand and strong parentage: HDFC AMC has a strong brand that customers trust, as evidenced by consistent leadership position in the Indian mutual fund industry. The company has a strong brand recall among Indian customers, and benefit from the brand reputation of promoters, HDFC and SLI. The strong parentage and trusted brand enhances appeal and provides confidence to customers.

Superior and diversified product mix distributed through a multi-channel distribution network: The AMCoffers a wide range of investment schemes across asset classes catering to various risk return profiles, many of which have recorded strong and consistent performance compared to industry benchmarks. The customers are serviced through an extensive multi-channel sales and distribution network comprising banks, national distributors and IFAs. The company has a pan-India network of 209 branches in over 200 cities. As of March 2018, the company has a sales and distribution team of 581 employees and a customer services team of 295 employees located across branches in India. The company has a strong online presence via digital platform for customers and distribution partners. For FY2018, approximately 14.4% of all transactions were through HDFC MFOnline and mobile applications. Electronic transactions grew at a CAGR of 46.2% from FY2015 to 2018. Electronic transactions formed 50.8% of all transactions in FY2018.

Focus on individual customers and customer centric approach: As of March 2018, MAAUM from individual customers accounted for 62.2% of MAAUM compared to 51.4% in the mutual fund industry in India as a whole. Individual customers tend to favor equity-oriented schemes, which generally attracts higher investment management fees in comparison to non-equity oriented schemes and individual customers tend to have longer holding periods. The company built a strong monthly flow of funds through systematic transactions, while recorded monthly flows of Rs 1150 crore through 3.16 million systematic transactions in March 2018. The number of systematic transactions has increased from 1.48 million as of March 2013 to 3.16 million as of March 2018. As of March 2018, 77.3% of systematic transactions at the time of registration had tenure of over five years and 64.2% of systematic transactions had a tenure of over 10 years.

Consistent profitable growth: The company is the most profitable asset management company in India in terms of net profits since FY2013, and had the highest share of net profits and total revenue of 18.8% and 13.5%, respectively, among asset management companies in India in FY2017. Employee related expenses as a percentage of AAAUM have been the lowest since FY2013. While employee base increased from 582 as of March 2013 to 1010 as of March 2018, employee related expenses as a percentage of AAAUM decreased from 0.10 in FY2014 to 0.06 in FY2018. Similarly, while the number of branches increased from 136 as of March 2013 to 210 as of March 2018, operating expenses as a percentage of AAAUM has decreased from 0.09 in FY2014 to 0.07 in FY2018.

Weaknesses

The asset management business is significantly affected by market fluctuations and general economic conditions, which could affect business in many ways, including by reducing the value of AUM, causing a decline in investment management fees, portfolio management fees or fees from advisory services, reducing systematic transactions, and causing customers to withdraw their investments, each of which could materially and adversely affect revenue, business prospects and financial condition.

The business also depends on consumer confidence in the overall economy, as well as overall economic growth rates, household savings rates and consumer attitudes towards financial savings, in particular, within India.

The equity and debt markets in India have been and may continue to be volatile and any such volatility will contribute to fluctuations in future AUM.

The performance of schemes is critical to retaining existing customers as well as attracting new customers, which is also an important factor in the growth of AUM.

A large portion of AUM is concentrated in a few schemes. As of March 2018, top six equity-oriented schemes constituted 79.1% of total equity-oriented AUM and top six debt schemes constituted 65.5% of total debt AUM. The performance of these schemes has a significant impact on AUM and consequently revenue. Underperformance by any of these schemes may have a disproportionate adverse impact on the AUM and revenue.

Any regulatory changes or competitive pressure leading to reduction in fund management charges can affect revenues and profits adversely.

Valuation

Revenues of the company have increased at CAGR of 20% from Rs 858.55 crore in FY2014 to Rs 1759.75 crore in FY2018. The company has posted healthy 19% CAGR growth in net profit to Rs 721.62 crore in from FY2018 from Rs 357.77 crore in FY2014.

The company has consistently delivered RoE of above 40% for last five years to FY2018.

Post-issue valuation is Rs 23319 crore at the upper price band of Rs 1100 per share and Rs 23213 crore at the lower price band of Rs 1095 per share.

EPS for FY2018 works out to Rs 34.04 on post-IPO equity basis. The scrip is offered at P/E multiple of 32.3 times FY2018 EPS at the upper price band.

The post-issue book value (BV) is Rs 101.9. The scrip is offered at a P/BV multiple of 10.8 times at the upper price band of Rs 1100 per share.

The recently listed peer company, Reliance Nippon Life Asset Management Company is trading at P/E multiple of 25.4 times FY2018 EPS and a P/BV multiple of 5.8 times. Reliance Nippon Life AMC is the fourth largest mutual fund in India with average AUM of Rs 244903.56 crore end March 2018, which has recorded RoE of above 24% for last three years to FY2018.

HDFC Asset Management Company: Issue highlights

For Offer for Sale Offer size (Rs crore)

- On lower price band

2787.60

- On upper price band

2800.33

Offer size (in no of shares)

2.55 crore

Price band (Rs)*

1095-1100

Minimum Bid Lot (in no. of shares )

13

Post issue capital (Rs crore)

105.99

Post-issue promoter & Group shareholding (%)

82.9

Issue open date

25-7-2018

Issue closed date

27-7-2018

Listing

BSE,NSE

Rating

55/100

HDFC Asset Management Company: Financials

1403 (12)

1503 (12)

1603 (12)

1703 (12)

1803 (12)

Sales

858.55

1022.44

1442.55

1480.04

1759.75

OPM %

56.6%

57.8%

46.3%

47.6%

54.9%

OP

486.33

590.90

667.51

703.89

966.46

Other Income

44.57

41.84

51.80

107.88

107.50

PBDT

530.90

632.74

719.31

811.77

1073.96

Depreciation

8.45

10.14

11.06

11.96

11.44

PBT

522.45

622.60

708.25

799.80

1062.52

Tax

164.68

207.10

230.37

249.56

340.90

PAT

357.77

415.50

477.88

550.25

721.62

EPS (Rs)*

16.88

19.60

22.54

25.96

34.04

*EPS is annualised on post issue equity capital of Rs 105.99 crore of face value of Rs 5 each